Ambrose Evans-Pritchard has covered world politics and economics for 30 years, based in Europe, the US, and Latin America. He joined the Telegraph in 1991, serving as Washington correspondent and later Europe correspondent in Brussels. He is now International Business Editor in London. Subscribe to the City Briefing e-mail.

Mr Barroso, Europe’s crisis has nothing to do with America

The Wall Street crash didn't cause the Great Depression in Europe in 1929 or now

All through the 1930s, the European elites continued to blame the Great Depression on Wall Street excess and the crash of 1929 (a minor, if colourful, event).

They continued to do so long after Roosevelt had broken free of fixed-exchange ruin and launched a blistering recovery with monetary stimulus a l’outrance (perhaps helped slightly by the New Deal).

They clung to this belief into the final years of the cataclysm, resolutely grinding their democracies into the dust by enforcing debt-deflation and contraction.

Blaming somebody else induced policy paralysis because it subtly diverted intellectual energy away from the root problem – then the Gold Standard, just as it is the D-mark Standard (euro) today.

So we have José Manuel Barroso, the ex-Maoist chief of the European Commission, telling the G20 global powers and assorted Anglo-Saxons that he is sick and tired of back-seat advice.

"The crisis originated in North America," he said. Sub-prime is the cause of Europe’s ills. American banks are the villains behind it all.

I was in the room recently when German Finance Minister Wolfgang Schäuble latched onto this argument, claiming with a straight face that everything was going swimmingly in Greece until the Americans blew it all up. Lehman was an American bank, he said, along with other such useful insights.

This is just poor science. Chronology is not causality.

As readers of this thread know well, it was a global credit bubble. The crisis happened to detonate first in the US because the American business cycle was a few months ahead.

The causes of the bubble are deep and complex. Global central banks – including the ECB – mis-set the price of credit by running zero or negative real interest rates for long-stretches.

They did so because the "China effect" of cheap goods flooding the world from Asia pushed down headline inflation at just the moment when central banks had foolishly begun to target that one variable. Their new doctrine blinded them to asset bubbles.

The effect was vastly compounded by some $10 trillion of reserve accumulation by China and the emerging powers. This was recycled into the global system as excess capital – not goods demand – depressing bond yields and greatly aggravating the sovereign bond bubble in southern Europe.

In other words, an excess of global savings over consumption is a large part of the narrative, and the reason why we cannot seem to recover.

The ECB made this worse in Europe by tilting monetary policy to German needs in the early part of the decade. It gunned the M3 money supply, further stoking bubbles in the fast-growing tiger economies of Spain, Ireland, etc. They sacrificed the periphery. With a few notable exceptions, Germans seem to have difficulty grasping this point.

The ECB then jammed on the brakes in mid 2008, raising rates AFTER the eurozone had tipped into recession.

Europe’s Club Med bubble was and is far worse than America’s housing bubble (now entirely corrected). Europe’s banks have a loan-to-deposit ratio of 1.3, like Japanese banks at the top of the bubble in 1990. America’s banks are a very healthy 0.7.

The eurozone’s €35 trillion banking nexus is the most leveraged and dangerous in the world. The ECB has turned this into a full-blown sovereign crisis by refusing to stop contraction of the money supply or conduct quantitative easing.

It has lent to banks instead of sovereign states in the most foolish manner, fostering the diabolic linkage between the two.

Mr Barroso went on to say:

Not all the members of the G-20 are democracies, but we are democracies, and we take decisions democratically. Sometimes this means taking more time.

Frankly we are not coming here to receive lessons in terms of democracy or in terms of how to handle the economy, because the European Union has a model that we may be very proud of.

Well, what can one say? I would accept that six or seven of the EU states are genuine long-established democracies. Others are – frankly, to borrow Mr Barroso’s diction – on probation, in historical terms. Some do not qualify at all. (I refrain from naming them for fear of extradition by one of their politico-magistrates under the European Arrest Warrant scheme, sold to voters as an anti-terrorism device and now used to muzzle free speech)

As for the EU itself, the organisation toppled the elected governments of Italy and Greece last year, replacing them with EU technocrats.

It ignored the NO votes to the European Constitution in France and The Netherlands, ramming through the slightly-altered text as the Lisbon Treaty without referendums – except in Ireland. When the Irish voted NO to that as well, they too were ignored.

That was the moment when the EU crossed the line altogether and lost fundamental legitimacy (at least for me). Lisbon is a rogue Treaty. Mr Barroso – charming though he may be – is a rogue president of a rogue Commission.

The whole construct has become authoritarian and will become autocratic if this crisis is exploited to force through fiscal union.

So we face democratic danger if they take the necessary steps to rescue the euro, and we face financial danger if they don’t.